The Platinum Coin Is Dead

Matthew Yglesias reports on the death of the platinum coin work-around the debt ceiling. The Federal Reserve has said it will not accept it. In his conclusion he points out how few people actually understand how money works.

All that said, I'm glad we had this conversation. Direct discussion of the platinum coin was a good reminder that many people, including influential media figures, appear to have no idea what money is or how the monetary system works. Apart from the shockingly widespread view that the value of coins is determined by their metallic content, there was a lot of insistence that creating money was somehow an act of "magic." In fact, the way all legal currency is created is that a government agency creates the money. Typically that's the Federal Reserve accommodating bank demand for base money. But all kinds of things can happen. Forget "Quantitative Easing." When the Fed does the thing that reporters call "raising interest rates" it doesn't pull an interest rate lever. It sells bonds on the open market in exchange for money. And when that money enters the Fed, it vanishes. When they "lower interest rates" they buy bonds on the open market in exchange for money. Where do they get the money? From nowhere. They just make it. That's money. Whether the electronic process of attributing more or less money to an account is accompanied by a little piece of platinum or not is wholly irrelevant.